SHAREHOLDER MEETING: YAHOO! (”YHOO”)
MEETING DATE: August 1, 2008
AGENDA ITEM: Election of Directors (proxy fight)
RECOMMENDATION: Vote “FOR” Dissident Gold Card
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We believe current shareholders of Yahoo would be well served by voting in favor of the full dissident slate sponsored by Carl Icahn at the company’s upcoming meeting on August 1. We believe the presence of Mr. Icahn and his nominees on the company’s board holds the best prospect for near-term value creation at Yahoo. We base this belief on the following:
- While we are hesitant to “endorse” Mr. Icahn and hold certain reservations regarding his past actions dating back to the 1980s, it is undeniable that he has been a voice of accountability and agent for change at several underperforming companies. Recent examples include Blockbuster, Time Warner and Motorola.
- A deal with Microsoft is not out of reach for Yahoo shareholders. The main obstacle preventing a bonafide offer from going through at this point appears to be Mr. Yang and his entrenched management team. New directors (either a full or partially elected slate) in the boardroom will likely instill the requisite focus on the company to fulfill its fiduciary obligations and pursue a deal that is in the interests of shareholders.
- Microsoft’s original $33/share offer was legitimate and should have been accepted by the Yahoo board. At minimum, the offer should have been a springboard for further negotiations. Instead, Mr. Yang, with the presumptive backing of his entire board, spurned the offer and responded with a $37/share counter offer. Most analysts viewed this valuation as ridiculous and the company’s share price since then demonstrates this.
- Just recently, Yahoo’s chairman has said publicly that the board of Yahoo is once again open to selling the entire company to Microsoft for at least $33/share, which was Microsoft’s original offer. (In turn, Microsoft has since said it is no longer interested in an outright buy). To us, this posturing by Yahoo demonstrates that the board does not have a clear handle on the process and, as a consequence, is failing in its duty to secure a legitimate offer for shareholders.
- Separating fact from fiction is always difficult in high profile proxy contests. However, from the outside looking in, the preponderance of the evidence seems to suggest that the Yahoo board has handled the negotiating process very poorly. Shareholders should use their vote to hold management (particularly the CEO) and the board accountable.
- Microsoft needs Yahoo in order to execute a viable internet strategy (which it doesn’t have at the moment). Without Yahoo, Microsoft is unable to compete against Google for online ad-revenue. Therefore, Steve Ballmer is extremely motivated to reach a détente with Yahoo that will allow him to save face with Wall Street and his shareholders.
- According to his open letter to shareholders on July 14th, Mr. Icahn has apparently already brokered an agreement with Steve Ballmer involving Yahoo’s search business that would provide existing Yahoo shareholders with a guaranteed $2.3 billion annual revenue from Microsoft for up to five years. In addition to the revenue, it is estimated that Yahoo could achieve well over $1 billion per year in cost synergies by selling off its search business. This is a significant development.
- If Mr. Icahn and his nominees were to gain seats in the Yahoo boardroom, we believe the dynamics surrounding future negotiations would change dramatically, and likely for the better.
- The fear of uncertainty under a new regime is always a pressing consideration for shareholders in proxy fights. However, under present conditions, we believe this risk is somewhat offset by the opportunity for existing shareholder of Yahoo to lesson losses by getting a deal consummated. Icahn is highly motivated and his interests are aligned with common shareholders in this regard. By comparison, Mr. Yang is personally incentivized to thwart a major deal (i.e. severance plan).
- Mr. Icahn has put forward high caliber nominees. Two nominees on Icahn’s director slate (Mark Cuban and Adam Dell) have sold internet/media companies to Yahoo and one nominee (Lucian Bebchuk) is a well-respected professor at Harvard Law school specializing in corporate governance.
- A “third option” exists which would provide for a 5-4 vote split in the election. This outcome would create a board composed of some combination of management and dissident nominees. In this instance, we do not think this is the most desirable outcome and instead favor a total changing of the guard. This fight is less about shareholder representation and traditional governance and more about getting parties to the table to ink a deal as quickly as possible. Icahn’s team will more effectively fulfill that role.
In sum, we are encouraging investors to take an aggressive posture with their voting by supporting the entire opposition slate. It is our view that this approach will more effectively bring the relevant parties together to get a deal done that is in the best interest of all shareholders. For the above reasons, we are advising investors to discard management ’s “white card” and instead vote the dissident “gold card” in the upcoming board election. In doing so, shareholders would be voting against the incumbant directors and in favor of the election of the following nine outside nominees: Carl Icahn, Mark Cuban, Adam Dell, Frank Biondi Jr. Lucian Bebchuk, John Chapple, Keith Meister, Edward Meyer and Brian Posner.
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